Gratuity: What You Get When You Leave a Job

Gratuity is the payment an employer makes for long service. Many employees do not know the amount until their final settlement arrives, which is exactly the wrong time to check it.

When you qualify

The basic condition is five years of continuous service with the same employer. Service beyond six months in the final year is usually rounded up to a full year for the calculation.

The five-year rule is relaxed in specific cases, including death or disablement of the employee. Some employers pay gratuity regardless as a matter of policy, so the contract matters as much as the Act.

The formula

For employees covered by the Payment of Gratuity Act:

Gratuity = Last drawn salary × 15 ÷ 26 × Years of service

The 26 comes from treating a working month as 26 days, which is why the multiplier is not simply half a month. Employees outside the Act typically use 15 ÷ 30 instead, giving a smaller amount unless the contract says otherwise.

On a last drawn basic plus DA of ₹50,000 and ten years of service, that is ₹2,88,461. Our gratuity calculator computes it for any salary and tenure, and shows both the covered and non-covered versions.

Salary means basic plus DA, not gross

This is the most common misunderstanding. Gratuity is calculated on the last drawn basic pay plus dearness allowance — not on your total salary. If your gross is ₹80,000 but basic plus DA is ₹50,000, the gratuity is based on ₹50,000. Expecting a figure based on gross leads to disappointment at settlement time.

Tax treatment

• For covered employees, the least of the actual gratuity, ₹20 lakh, and 15 days' salary per year of service is exempt.
• Anything above ₹20 lakh is added to your taxable income.
• The ₹20 lakh limit applies across all employers over your working life, not per job.

Gratuity is one line in a larger settlement

When you leave, the final settlement usually combines several payments: gratuity, your provident fund balance, pending salary, leave encashment, any bonus or variable pay and, in some cases, notice pay. A settlement that looks low is not automatically a gratuity error.

Check each component against your own records before querying the total. PF can be verified from your EPFO passbook, leave encashment from your leave balance, and gratuity from the formula. Knowing which number is wrong makes the conversation with payroll much faster — and the EPF calculator and salary calculator cover the other two pieces.

Planning note

If your gratuity is likely to exceed ₹20 lakh — which happens with long service and high salary — the excess is taxable. There is little you can do to change the calculation, but knowing the number in advance prevents a shock, and helps you decide whether to negotiate other components of an exit instead.